3M (MMM) reports Q2 results tomorrow before the open, the options market is implying about a 3% one day move tomorrow, or about $7. The stock has been volatile of late post-earnings, moving close to 5% on average over the last four quarterly reports, which is rich to its 2.8% average over the last ten years.
Shares of MMM are having a horrid 2018 to say the least down 15.5% so fae, and down nearly 24% since making an all-time with the S&P 500 (SPX) in late January. Connect the dots any way you like, but some Old Skool Risk Reversal fans will recognize this ominous chart pattern… the triangle of death:
To suggest this chart is at an inflection point is an understatement. Another miss and guide lower and this stock is rejected at the downtrend, and through support near $194 and is on its way back to the 2017 lows near $180. That said, a beat an raise with sentiment so poor and this stock is on its way to filling in that earnings gap from April.
The five-year chart below shows just how important the April breakdown was as it as a gap on massive volume below the uptrend that had been in place from the 2015/2016 double bottom low. I would also add that it also reinforces the resistance level at $220 as that is also the uptrend from 2016:
As for sentiment, as mentioned above, usually bullish Wall Street analysts hate the stock with only 4 Buy ratings, 10 Holds and 4 Sells, next to General Electric (GE) I am hard pressed to think of another mega-cap industrial stock so widely hated by the analyst community.
Even with the stock’s decline, shares of MMM are not cheap, trading about 19x expected 2018 eps growth of 13% and 18x expected eps growth of 8% on expected sales growth of 5% and 4% respectively.
Since the company offered guidance on April 24th, the U.S. Dollar Index (DXY) is up about 4%, which might have impacted results in the quarter as about 60% of MMM’s sales come from overseas, and while the dollar found some resistance near the prior highs, there has been much talk about one of the main retaliatory measures our trading partners might have is to weaken their currencies at a time when our Fed is raising rates, also putting upward pressure on the dollar.
On the flip side, though the recent decline in industrial commodities of nearly 10% from the recent highs might offset dollar gains as these are large input costs to MMM’s prodcution.
So what’s the trade? It feels kind of binary to me so I’ll lay out a couple of trade ideas for Aug expiration that would benefit from a beat and raise or a miss and guide down for those with directional views:
Bullish Trade Idea: MMM ($199) Buy Aug 200 / 215 / 230 call butterfly for 3.40
-Buy to open 1 Aug 200 call for 4.75
-Sell to open 2 Aug 215 calls at 75 cents each of 1.50 total
-Buy to open 1 Aug 230 call for 15 cents
Profits of up to 11.60 between 203.40 and 226.60 with max gain of 11.60 at 215
Losses of up to 3.40 between 200 and 203.40 & between 226.60 and 230 with max loss of 3.40 below 200 and above 230′
Rationale: this trade idea risks 1.7% of the stock price with a break-even up 2.2% for the potential of gain of up to 6% of the stock price if the stock was up to 215 by ug expiration, while allowing for an overshoot to the upside.
Bearish Trade Idea: MMM ($199.50) Buy Aug 197.50 / 185 Put Spread for 3.20
-Buy to open 1 Aug 197.50 put for 4.35
-Sell to open 1 Aug 185 put at 1.15
Break-even on Aug expiration:
Profits of up to 9.30 between 194.30 and 185 with max gain of 9.30 at 185 or lower.
Losses of up to 3.20 between 194.30 and 197.50 with max loss of 3.20 above 197.50
Rationale: this trade idea risks 1.6% of the stock price that makes a defined risk bearish bet into earnings that breaks-even down at a very key technical support level.
I’ll offer our usual disclaimer for long premium directional trades into events like earnings, it is a hard way to win on a consistent basis as you need to get a lot of things right to merely break-even, starting with direction, but also magnitude of the move and timing.